Daily deals are profitable for many businesses—but not so much for retailers

By Zak StamborManaging Editor

A report finds that only half of retailers that run a deal turn a profit.

Running a daily deal with operators like Groupon or LivingSocial may not be such a great deal for retailers, according to a new study by a Rice University researcher. Only 50.0% of retailers—both online-only and multichannel—turn a profit after running a daily deal on sites like Groupon or LivingSocial, according to the report. That stands in contrast to 61.5% of all merchants who run a daily deal turning a profit, up 10.8% from 55.5% in spring 2011. There was no breakout of the types of businesses in spring 2011. Other industries fare much better running deals. For instance, 75.0% of photographers reported making money on their offers, as did 68.0% of tourism-related service providers which includes businesses such as tour companies. The report is based on a survey of 641 small- and medium-sized business owners. Across all industries, daily deals are an effective way to acquire new customers, the report finds. 80.7% of the customers acquired via a daily deal were new to the business running the deal, up slightly from 79.2% in spring 2011. Moreover, 20.4% of deal users became repeat customers, the businesses reported, up a tick from 19.9% in spring 2011. The report also found that businesses that spend very little—or nothing—on marketing were just as likely to profit from their daily deals as those that spent a lot on other forms of advertising. That suggests that whether a daily deal turns a profit may be independent of other marketing efforts. “These results are encouraging for the daily deal industry,” writes Utpal Dholakia, an associate marketing professor at Rice, in the report. “They provide no evidence to support the conventional wisdom that daily deals are working less effectively for businesses than they did in the early stages of this industry’s evolution.”